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Davy Crockett Co makes hats, mainly for fancy dress costumes. The company expected to produce 25,000 hats during the year which would be expected to incur $125,000 in fixed costs. The total cost of each hat is $30 (including fixed costs) and the company can sell them for $40 each. Sales during the year were 15,000 hats from a production volume of 20,000. Actual fixed costs were $80,000 and there was no opening inventory
What is the marginal costing net profit for the year?
Sir in this this question actual answer is 145000.
I am getting correct answer when doing it with a profit and loss account, but when using formula (change in profit =change in inventory× oar per unit) I am getting different answer. I did it by first finding profit by absorption costing method.
10×15000=150000
Then subtracted over absorbed overhead.
25,000.
Profit 125000Change in profit = 5000 × 5=25000
Marginal Costing profit= 100000.
This question is from BPP Text !!
I hope that you would not attempt to do this both ways in the exam – there would only be 2 marks and you would not have the time 🙂
The over-absorption of fixed overheads is (20,000 x $5) – $80,000 = $20,000.
Therefore the absorption profit is (15,000 x $10) + $20,000 = $170,000.The difference in the profits is 5,000 x $5 = $25,000, and because the inventory is increasing the absorption profit will be higher than the marginal profit.
$145,000 + $25,000 = $170,000
Have you watched my free lectures on this? The lectures are a complete free course for Paper MA and cover everything needed to be able to pass the exam well. If you are watching the lectures then you do not really need the Study Text.
The essential book (however you choose to study) is the Revision Kit, because it is full of exam standard questions for practice.Sir how did you get absorption costing as 145,000 as units sold are only 15000 and shouldn’t we subtract over absorbed overhead from it to get profit??
The absorption costing profit is not 1450,000 – it is $170,000 and I have shown the workings in my previous reply!!
The marginal costing profit will be lower by $25,000 and is therefore $145,000 (and you said that you had been able to calculate the marginal costing profit of $145,000).
You did not answer my question as to whether you have watched my free lectures on absorption and marginal costing.
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